An ISA is an Individual Savings Account that allows you to save or invest in a tax efficient way. There are different types of ISAs to help you achieve different goals and the main types are: cash ISA, stocks and shares ISA, junior ISA, lifetime ISA.
You can pay into as many cash and stocks and shares ISAs as you choose each tax year, as long as you don’t exceed the maximum allowance of £20,000. Lifetime ISAs are slightly different in that you can only pay into one of these each tax year. Here's about how to take advantage of your ISA allowance...
CASH ISA
The interest rates on cash ISAs vary depending on factors such as whether you are able to lock your money away for a fixed term, or require an account that allows you instant access. Although these are low risk, they are subject to inflation risk, so the long term purchasing power of your money could be eroded by the effects of inflation. They are more suitable for the short-term, and a good place to put away cash you might need to take out at some point in the near future.
STOCKS AND SHARES ISA
Within a stocks and shares ISA, you can hold a portfolio of investments (including shares and funds) and try to grow your savings more than you might do within a cash ISA. The investment gains are free of income tax and UK capital gains tax. As your money is invested, this approach involves taking more risk than within a cash ISA and you should be mindful that the value of your investments may fall as well as rise. Therefore, you may receive less back than initially invested. This type of investment would not be recommended for anyone who may need to access their money sooner than 5 years - so it’s only appropriate for those with a medium to long term timeframe.
JUNIOR ISA
A Junior ISA is a tax-efficient investment account for children under 18. Any returns are free from UK income and capital gains tax. Parents or legal guardians can start a Junior ISA for their child, and when your child reaches 18 they may access the money. This could be a great way to save towards university fees or even a deposit to step onto the property ladder. The current allowance for a Junior ISA is £9,000. p.a.
LIFETIME ISA
Assuming you’re between 18 and 39, you can save up to £4,000 each tax year into a Lifetime ISA and the government will add an extra 25% on top. Once your Lifetime ISA has been open for a year, you can withdraw money to use towards the purchase of your first home (£450,000 maximum purchase price). Alternatively you can leave the money until you reach age 60 - you can then withdraw it without penalty. Please note that there are rules around withdrawals and there will be charges applied if these are not met. So it is important to fully understand the product and restrictions before investing.
AND COMING SOON...
At the Spring Budget the Chancellor announced plans to launch a new ISA called a ‘British ISA’. This will be an additional £5,000 allowance (on top of the existing £20,000 allowance) that will allow tax free investment into UK shares to help encourage investment in UK companies. Full details regarding this new ISA will be confirmed in due course.
The article outlines just some of the details regarding ISA allowances. It does not represent financial advice. If you would like personalised financial advice, please contact a financial adviser.
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